Surety Bad Faith

Tort Recovery for Breach of a Construction Performance Bond

This note examines tort recovery for breaches of performance bonds. In the construction industry, it is customary for the construction project owner to require the contractor to secure a performance bond. A performance bond is a contract in which the bonding company guarantees to the project owner that the contractor will faithfully fulfill its obligations under the construction contract. The author argues that the construction project owner should not be allowed to recover damages in a tort action for a breach of the covenant of good faith and fair dealing, which is implied in a construction performance bond.The note begins by discussing how recovery for a breach of contract is traditionally limited to damages arising from the breach itself, not for a surety’s breach of the covenant of good faith and fair dealing. Next, the author provides a background, detailing the development of allowing tort recovery for the breach of the covenant of good faith and fair dealing. Finally, the note analyzes the policies in favor of and against allowing tort recovery for a surety’s bad faith.The author asserts that courts should not allow a project owner to receive tort damages against a surety. Instead, courts should limit a project owner’s recovery against a surety to traditional contractual remedies. Due to the nature of the construction industry and the fact that the surety is more of a third-party in the construction project, tort recovery is inappropriate.

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